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Learn MoreIndustries change and ours is no different. 25 years ago, the advisory business was low-tech and high-touch. Advisors would cater to clients like a friend and anything short of a phone call was considered insulting. They would show up to their clients’ homes or workplaces with a simple yellow pad and work closely to craft a plan that was entirely customized to their needs, wants, and behavior. But then the so-called “robo-advisors” entered the space.
Financial advice is by no means the first industry to be affected by “robots”. Take the car manufacturing business as an example. Everything about that industry, even their iconic assembly line, has been changed by robots. What was once a hive of human activity is now a mass of complex machinery that is faster, safer, more efficient, and just plain better than its human-powered predecessor. But even though a once bustling assembly line is now devoid of human life, the robotic assembly line has actually had a positive impact on the number of jobs in the industry.
Robots had much the same story to tell with tax professionals back in the eighties. When DIY services like Turbo Tax appeared on the scene, many called it the end for tax professionals, but lo and behold their business thrives to this day. So from a purely pragmatic and historical point of view, robots seem to be good thing for any industry they invade.
But are robo-advisors a good thing for our industry? Financial advice is complex and nuanced. Not only is there the stock market to contend with, but there is also the most important and often over looked variable, the client.
In providing a service that is high-tech and low-touch, robos attempt to circumvent both the market and the client. Their technology, or more accurately, their algorithm, purports to solve the problem of trying and failing to beat the stock market by creating an automated way to rebalance a portfolio and harvest losses. They then take a complex issue – personal finance – and simplify it for clients into an easy-to-use, easy-to-understand process that is, here’s the kicker, a fraction of the cost. Almost sounds too good to be true.
Yet there is no doubting the rise of robo-advisors. According to Corporate Insight, they have amassed over $16 billion in assets and have received an additional $1 billion in venture capital funding. One of the most popular services, Betterment, has roughly $1 billion in assets alone. Their process is simple: enter your information, start investing, and then let their technology do the rest. But this process is more hypothetical than practical and stops short of addressing many of the issues advisors help clients overcome.
When a client’s real questions and issues become apparent, robo-advisors leave them wanting more and leave the door open for a human advisor to come in. Schwab seems to have noticed this too, and recently rolled out their own robo-advisor to capitalize on the various stages of a client’s needs, provoking a critical response from the start-up robo-advisors like Betterment and WealthAdvisor. They argue Schwab’s platform is just a Trojan horse that smuggles Schwab’s own proprietary products into a client’s portfolio, under the guise of a free platform.
But I’ll leave it to them to bicker over what is the best approach for their business model, because I think it is flawed to begin with. Look at their claim to fame, the idea that lower fees equal more money to invest. Schwab, for instance, advertises a picture perfect portfolio that somehow manages to earn 6% a year for 20 years, and then uses these returns as evidence for the superiority of their product’s pricing against traditional methods. Adam Nash, the Chief Executive at Wealthfront, summed Schwab’s efforts up perfectly when he said, “There is a potential for loss as well as gain that is not reflected in the information portrayed.” Pot calling the kettle black, if you ask me.
Any investor can tell you it never happens as rosily as Schwab’s chart portrays, and any advisor will be more than happy to explain the inevitable client reaction that happens the second those returns turn from positive 6% to negative 6%. These same advisors will go on to tell you that if they’re able to prevent a client from making any rash decisions during those down months or even years, then he or she will have more than earned their fee. And that is where the battle lines are going to be drawn.
The gap between technology and the client is exactly where an advisor’s opportunity lies. They can take a client’s goals and turn them into an actionable and customizable financial plan, using the most advanced technology to help them do so. Because the winners of this race will be those who can combine leading edge technology with the expertise of a knowledgeable advisor.
And as for the idea that robo advisors provide sophisticated wealth management to people who were unable to afford it before – that might be their legacy. More intriguing however, is the idea of leveraging robo-advisors for client segmentation. Using robo technology, traditional advisors will be able to segment their clients depending on their needs, wants, age, wealth, and any other range of determining factors. For example, an advisor will be able to provide a young client the platform needed to build their wealth gradually with little to no cost and then switch them over into a higher-touch, but higher-cost program as retirement, with all of its intricacies and unique challenges, looms.
The technological arms race has been nothing but beneficial for financial advisors. Among their arsenal of online tools, they now have automated client management, real-time financial planning enhanced by data aggregation, and interactive client portals, just to name a few. Additionally, integrations between the industry-leading providers of these technologies are taking the effectiveness and efficiency of these technologies to a whole new level.
Advisors agree, too. According to the latest Investment Adviser Technology Study, 50% of advisors surveyed said they plan to upgrade their technology within the next six months and named integrated solutions as their primary focus. On top of that, 90% said they did not plan on using “Robo-Advice” within the next year. In short, they think future of technology will be a bright one for human advisors.
As technology arms advisors to do more than anyone ever thought possible, I know one thing is for sure: The term “robo-advisor” will become a thing of the past, as outdated as the yellow pad advisors used to scribble notes on in the past.
